Sept. 4 (Bloomberg) -- U.S. manufacturing shrank for a
third month in August in the longest decline since the recession
ended in 2009, threatening to deprive the world’s largest
economy of a driver of growth.

The Institute for Supply Management’s factory index fell to
49.6 last month, the lowest since July 2009, from 49.8 in July,
the Tempe, Arizona-based group said today. Economists in the
Bloomberg survey projected an August reading of 50, which is the
dividing line between expansion and contraction. Measures of
orders and production dropped to three-year lows.

Stocks fell early on concern American factories, which
sparked the U.S. expansion three years ago, are succumbing to a
manufacturing slowdown that stretches from Asia to Europe. The
data underscore Federal Reserve Chairman Ben S. Bernanke’s view
that the economy is too weak to spur hiring and may require
additional monetary stimulus.

“Manufacturing has been one of the stalwarts of an
otherwise lackluster recovery but it’s starting to show some
cracks,” said Richard Moody, chief economist at Regions
Financial Corp. in Birmingham, Alabama, who correctly forecast
the index. “Until we get more clarity on the fiscal policy
outlook here, more clarity on Europe and some signs on the
course of China’s economy, manufacturing is just going to
languish.”

The Standard & Poor’s 500 Index, which had fallen as much
as 0.7 percent, dropped 0.1 percent to 1,404.94 at the close in
New York as shares of Apple Inc. rallied. The yield on the
benchmark 10-year Treasury note climbed to 1.57 percent from
1.55 percent on Aug. 31.

Estimates for the supply managers’ index from the 81
economists surveyed ranged from 48.7 to 51.5. A reading above
42.5 generally indicates an expansion in the overall economy,
the ISM has said. The gauge averaged 55.2 in 2011 and 57.3 a
year earlier.

Assembly lines slowed as orders weakened, details of the
report showed. At the same time, inventories at manufacturers
built up and backlogs eased, indicating the weakness at
factories may be extended.

“As I look at this and try to find some rays of sunshine,
it’s quite difficult,” Bradley Holcomb, chairman of the ISM
survey, said on a conference call with reporters. “I would
characterize this as a sobering picture of U.S. manufacturing
right now without any clear signs of immediate improvement.”

Production, Orders

The group’s production index decreased to 47.2, the weakest
since May 2009. The new orders measure fell to 47.1, while the
employment index dropped to 51.6, the lowest since November
2009.

The measure of orders waiting to be filled fell to 42.5
from 43. The inventory index rose to 53 from 49.

A gauge of manufacturing in the 17-nation euro area based
on a survey of purchasing managers was revised lower to 45.1 in
August from the reading of 45.3 estimated earlier, Markit said
yesterday. The index, which stood at 44 in July, has held below
50 for 13 months.

In China, manufacturing slowed further in August, surveys
of purchasing managers showed, with one gauge at the lowest
level since March 2009.

Consumer Demand

The slowdown at U.S. factories comes as 8.3 percent
unemployment restrains consumer demand and cooling global growth
reduces new businesses orders. Household spending increased at a
1.7 percent annual rate in the second quarter, the smallest
advance in a year, Commerce Department data show. Corporate
purchases of equipment and software rose at a 4.7 percent pace
in that period, the weakest since the third quarter of 2009.

Bernanke said Aug. 31 that the central bank considers
additional bond purchases an option to spur growth. Stagnation
in the labor market is a “grave concern” because it could
create lasting economic damage, he said during a speech in
Jackson Hole, Wyoming.

The future pace of production also depends on whether
global growth continues to cool, damping demand. The euro-area
economy shrank from April to June, the third straight quarter
without expansion, according to the European Union’s statistics
office. China’s growth decelerated last quarter from a year
earlier for the six consecutive time.

Global Economy

“We remain cognizant that there is the potential for
further deterioration of the world economies,” Rick Cote,
president and chief operating officer of watchmaker Movado Group
Inc., said during an Aug. 28 earnings call. “Our plans continue
to anticipate moderate growth in North America, modest growth in
Northern Europe, declines in Southern Europe and solid growth in
Asia and South America.”

Another report showed construction spending in the U.S.
unexpectedly fell in July for the first time in four months as a
plunge in home-improvement outlays overshadowed gains in
homebuilding.

The 0.9 percent drop was the biggest decrease in a year and
followed a 0.4 percent gain in June, according to the Commerce
Department. Outlays on remodeling projects, which are volatile,
slumped 5.5 percent.